What Limits Apply If I Participate in Two Company Plans?

By Ian Berger, JD
IRA Analyst
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We continue to get questions about the limits that apply for folks who participate in multiple company savings plans at the same time or who switch jobs in the middle of the year. What’s confusing is that there are two limits – the “deferral limit” and the “annual additions limit,” and you need to comply with both.

Deferral limit. The deferral limit is based on the total pre-tax and Roth deferrals (but not after-tax contributions) you make to ALL your plans for the year. The limit is indexed periodically and for 2020 (and 2021)  is $19,500, or $26,000 if you’re age 50 or older by the end of the year.

Example: Christina, age 42, has a regular job with Acme Industries that sponsors a 401(k) plan and also owns a sole proprietorship that has a solo 401(k). In 2020, she has contributed $19,500 to Acme’s plan. Christina is unable to make any elective deferrals to the solo because she has already maxed out on the deferral limit through the Acme plan.

There is one exception to this rule: If you’re eligible for both a 457(b) plan and either a 401(k) or a 403(b) plan, you can defer up to the maximum limit to each plan.

Exceeding the deferral limit is a double headache – the excess amounts may be taxed both in the year they are contributed and in the year they are eventually paid out. To avoid this, monitor your deferrals closely and contact your plan administrator ASAP to have any excess amounts, plus earnings, distributed to you. This must occur by the following April 15 to avoid double taxation.

Annual additions limit.  This limit (also known as the “415 limit”) regulates the amount of all contributions (employee and employer contributions) that can be made to any plan in any year. Contributions made to all plans maintained by one company are aggregated. Contributions made by two or more companies considered related under the tax rules are also aggregated. But if you are in two plans sponsored by unrelated companies, a separate limit applies to each plan. For 2020, this limit is $57,000, or $63,500 if you make 50-or-over catch-up deferrals. For 2021, it is $58,000 or $64,500.

For small employer plans (like solo 401(k) plans and SEPs), the rules are more complicated because of IRS deduction limits.

Example: From the above example, if Christina’s sole proprietorship is unrelated to Acme, she has a separate annual additions limit for the solo 401(k). So, Christina could theoretically make up to $58,000 of employer contributions to the solo. However, her contribution limit will likely be lower because employer contributions are effectively capped at 20% of earned income.

If your annual additions exceed this limit, it is up to the plan sponsor to fix the problem by notifying you and distributing excess amounts to you under the method required by the IRS.

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